Stocks made a swift and historic comeback from the market’s April bottom, with the S&P 500 (^GSPC) closing at a record high on Friday.
Now, as the first half of 2025 draws to a close, overarching risks are all but removed. From tariff-driven inflation pressures to conflicting economic signals and murky data, what lies ahead is anything but straightforward.
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“We are going to see an inflation reacceleration that will be tariff-induced,” EY chief economist Greg Daco told Yahoo Finance on Friday. “There’s more pressure to come into the economy [and that will lead to] income erosion and a consumer spending slowdown. That is really the picture that we should expect in the second half of this year.”
The latest reading of the Federal Reserve’s preferred inflation gauge reflected some of those concerns, with price increases accelerating in May as inflation remains above the Fed’s 2% target amid underlying signs of slowing economic growth.
“The broad picture is that we are going to be in an environment where we’re going to see increased fog in the data at the same time as there is increased fog from policy uncertainty,” Daco said, adding it’s a “combo that is not ideal for anybody that is looking to plan for the next few years.”
That includes the Federal Reserve, as policymakers walk a delicate line when deliberating potential rate cuts. And while some Fed officials have reopened the door to a July cut, Daco believes the bar remains high.
“I think we should not expect a July rate cut,” he said. “The majority of the FOMC voting members are not on board.” Instead, Daco sees September as the more likely pivot point, with economic momentum expected to cool further in the coming months.
“We will have seen more demand erosion, we will have seen a labor market that unfortunately has slowed, and income growth as a result has slowed,” the economist explained, noting that this slowdown could outweigh the risk of near-term inflation reaccelerating from tariffs.
“The Fed is going to have to decide to, on the side of caution, focus more on the growth slowdown because the inflation effect is likely to be short-lived.”
Those economic concerns, however, have yet to weigh heavily on investors. Markets have powered higher, led by strength in tech and financials, as consumer sentiment rebounds and traders digest growing clarity around trade policy.
“The markets are starting to focus on some of the more positive growth aspects,” said Keith Lerner, co-chief investment officer at Truist, pointing to the eventual passage of President Trump’s tax bill, deregulation efforts, and the anticipated arrival of rate cuts. “So I think all that means the market does move higher,” he added. “But there will certainly be some gut checks along the way.”
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